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How To Invest In Out-of-State Rental Properties

By Suresh Kannan

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    As with any new endeavor, investing in real estate for the first time, let alone out-of-state investing — can be a scary and nerve-racking proposition. I was always fascinated by real estate investing and the success stories that were shared in blogs and podcasts. I started reading books, listening to podcasts for years since 2018. Still there was something holding me back, and it’s the FEAR of the unknown. During this time, I also learned to analyze single family rentals in and around Northern California as that’s where I live and felt comfortable with.

    Pretty soon I realized, the various methods I learned to evaluate an investment property were not working in the nicer neighborhoods I was looking for. That frustration and my drive to break this procrastination cycle pushed me to take the plunge and buy my first out-of-state single-family rental in Fort Worth, TX in March 2021.

    In this post, I will address the issues/blockers that many of the new investors have, and which is preventing them from investing in the first place. I will share these 3 things that are crucial in taking the first step:

    • How to find out-of-state properties to purchase?
    • How to analyze/perform due diligence and make offers remotely in a competitive market?
    • How to manage the property remotely?

     

    Why I started Investing in single family homes

    Having owned a primary residence, I thought I would start investing in single family rentals. When you buy a primary residence, you are exposed to the process of acquiring a home and maintaining it. SVIC member Kristina Flathers wrote a great piece on Long-Distance Real Estate Investing and Jordan Thibodeau wrote a great piece on How To Evaluate Real Estate Investments and How To Interview Property Managers, which are critical for long distance management of real estate. Next step is to research the top cities that have huge upside potential.

     

    Step 1: Picking the right city to invest

    Focus on these five metrics while picking the city:

    1. Population Growth – You want to invest in a city that has a steadily growing population because that will lead to property and rent appreciation. How do you find a city’s current population? Search via Google and enter “population” and your desired city and state. From the data, you should have at least 20% growth since 2000 to the current year.
    2. Median Income Growth – Median income growth is a great indicator if the general economy is healthy and can support reasonably priced rentals. You can get this from City-data.com. My rule of thumb is looking for at least 30% growth from 2000 to the current year.
    3. Median Home Prices – The next metric we want to look at is median home prices. When population growth is ~>= 20%, median income is ~>= 30%, then median home prices for that city between the years 2000 and current year should be at least >= ~40%.
    4. Crime Rate: Jordan has a great post on the effects of crime on real estate markets. You can find this in the same City-data.com site. You will find a table with crime numbers, focus on the last row of this table (dark blue), scroll to the right and it should be <500 and it should be in the downward trend from the prior years.
    5. Job Growth: This is another critical indicator; make sure the city you pick has strong job growth because this will lead to higher demand for real estate. You can get the data from: https://www.deptofnumbers.com/employment/metros/

     

    Additional questions to consider:

    Based on Lisa America’s article on real estate investing, you can also ask yourself the following questions:

    • How long do I want to hold this property?
    • Historically, has this area been a good opportunity for long-term investments?
    • Will it continue to be a good area for long-term investments?
    • Am I trying to cash-flow each month? 
    • If I’m not cash-flowing then why am I investing? *Sidebar: Great question! A lot of buyers think of investment properties in terms of cash-flow purposes only, but it’s far from the only option. Your strategy might be to hold onto the property long-term with the goal of the property value increasing year-over-year, but with the potential risk, it might not appreciate, so keep that in mind. Not every market is able to cash-flow easily, so discuss your investing strategies with your realtor and ask what to expect in his/her market.
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    Step 2: Finding the right realtor

    Now that you have picked the city that matches your investment criteria, find the local realtors in that area. If you’re an SVIC member, you can use SVIC’s pro finder to find a realtor. Also, you can use SVIC’s real estate investors tool box for a list of questions to ask the realtor when you are interviewing him/her. You can also search Zillow, Redfin, or Bigger Pockets to find some reputable realtors.

    Now before you pick up the phone, think about what you are looking for in a great agent and how you can make yourself desireable to the agent; know that you are both interviewing each other. Call them and explain to them very clearly what you are looking for—which cities and even zip codes (the more specific you are, the easier it gets for both of you). Request them to get a search list for you so you start getting matching properties.

    Once you receive the list of properties, do your analysis and shortlist the ones that’s appealing to you. Request your realtor to video call and do a walkthrough of the property and also to let a quick visual check for key aspects like: electricity, plumbing, roof, water leaks, and cracks in ceiling or walls. Once all that checks out, make an offer through your realtor for an amount that makes sense and gives a postive cash flow (use any of the rental calculator of your choice). Your realtor is your eyes on the ground so build a good relationship with them; if possible, fly down and visit in-person and explain and share your goals.

     

    Step 3: Finding the right property management company

    Once the offer is accepted, you can ask for property management companies in that city. Interview them (if you need interview questions, check out this great article), get some references, ask other SVIC realtor friends, Bigger Pockets or just talk to a few of them and see how they respond. Check their reviews and after shortlisting, find the one you can trust; let them handle the rest and you receive the monthly checks to your bank account.

     

    Final Thoughts

    To conclude, I totally understand the feeling about investing in out-of-state when we can’t be there physically and drive down there to fix or check on the property. Trust me, it’s one of the best things I did considering how busy we are with our STEM jobs every day. Of course, we can’t anticipate all the permutations of what can go wrong, but if you follow the above steps, we can minimize our risk considerably. 

    Wish you all the best in this journey!

     

     

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